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Thursday, June 25, 2009

Yesterday the Census released a rather positive durable goods orders report, which got lost in the shuffle of new home sales and FOMC reports. According to the Census:

New orders for manufactured durable goods in May increased $2.8 billion or 1.8 percent to $163.9 billion, the U.S. Census Bureau announced today. This was the third increase in the last four months and followed a 1.8 percent April increase. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders also increased 1.4 percent.

But that is only part of the story. Capital spending on nondefense ex aircraft (which rids the data of the 68.1% monthly gain in nondefense aircraft and parts) got a hefty 4.8% bump. The implication is: that business investment in equipment and software may be stabilizing (about 8% of overall real GDP).

The chart illustrates the annual growth rate in total durable goods orders and the nondefense excluding capital goods orders (core capital spending). Both levels are down more than 20% over the year, but the core capital goods spending seems to be stabilizing. That's good, because core capital spending is a good monthly proxy for business capital spending in GDP.

The chart above illustrates the relationship between the annual growth of real core capital spending (deflated using the PPP for capital equipment and converted to quarters) and equipment and software business investment (part of the I in Y = C + I + G + NX). The polynomial relationship has an R^2 equal to 0.78; this suggests that a stabilization in business capital spending may be on the horizon.

I don't expect capital spending to boost GDP in Q2 , as actual shipments (filled orders) are still down over April and May. But the outlook for Q3 is now a (little) bit brighter.